Monthly economic update with MLC, July 2019

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Manager Myooran Mahalingam about the first rate cut in a decade from the US Federal Reserve, as well as the continuing trade tensions between the US and China and the resulting impacts on global markets.

Myooran Mahalingam: Welcome to the monthly economic and market update. My name is Myrooran Mahalingam and it's my very great pleasure to be chatting with our senior economist Bob Cunneen. Hello, Bob.

Bob Cunneen: Thanks, Myrooran.

Myooran Mahalingam: The month of July saw something that's never happened in the last 10 years, which is the US Central Bank cut interest rates. Would you care to explain, Bob?

Bob Cunneen: Yes, so the Federal Reserve, America's Central Bank, has cut interest rates by a quarter percent, which is quite extraordinary given that there's still a very solid US economic growth profile at the moment.

Unemployment's down at 3.7%, lowest in nearly 50 years, so from that point of view, the Federal Reserve has signaled that they're cutting interest rates because they're concerned about the global economy, and in particular the trade tensions. So this issue between America and China in terms of putting tariffs on imports has caused the Federal Reserve to cut interest rates.

And Wall Street has rallied quite strongly on the back of this. The S&P 500 made record highs above 3,000 in July, but since then, since President Trump has raised tariffs again on Chinese imports, the American stock market has fallen quite sharply in early August.

Myooran Mahalingam: And so this cutting of interest rates which is symptomatic of slowing economic activity, is this a mid-cycle slowdown, Bob, or is this something that's going to be more prolonged?

Bob Cunneen: Well, in terms, the American economy's doing reasonably well, but the global economy is essentially struggling.

So if we think about China's economic growth being the lowest in about 15 years, we think about Europe, also very slow, 1% tight economic growth, UK is facing Brexit, so all of these global risks have caused the Federal Reserve to say America's okay, but there are downside risks to the American economy because of these global concerns.

Myooran Mahalingam: On the political front, there were two events that got headlines in the newspaper. One was the trade tension between President Trump and China, and secondly, the United Kingdom has a new prime minister.

Bob Cunneen: Yes. So Boris Johnson is now the prime minister after Theresa May, and Boris has promised that Britain will exit from the European Union on October 31st, and he's prepared to take Britain out without a deal with Europe.

This is known as a hard Brexit and it opens up downside risk to the UK economy because Europe is their key trading partner in terms of exports. So if you think about cars such as Jaguars and Minis going to Europe, this is a key concern for the British manufacturing industry and for the wider British economy that they won't have as good a trade access as they have in the past.

Myooran Mahalingam: So with this trade tension uncertainty around Brexit, slowing economic conditions, central banks cutting interest rates, why are stock markets hitting all-time highs?

Bob Cunneen: It's specifically America in terms of the stand and pause, and Australia. So Australia has benefited from a lower Australian dollar, but also the Reserve Bank cutting interest rates in June and July.

But what we have to bear in mind is that the Australian economy is still struggling. We have housing construction that is falling, car sales are weak, retail spending is subdued, so the Reserve Bank has responded by cutting interest rates, and with the lower interest rates, that's pushed up the share market. So that's a positive, but we need to see an improvement in the Australian economy to see that this share market performance is sustainable.

Myooran Mahalingam: Bob Cunneen, thank you very much indeed for your time. 

Bob Cunneen: Thank you, Myooran.


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